FINANCE NOTES Sunil Karla.

1) The three main financial statements:

Income Statement
Balance Sheet
Statement of Cash Flows

CAPITAL MARKET:
MARKET: The market for securities, where companies and the government can raise long-
term funds. The capital market includes the stock market and the bond market. It is a place where
investors come together to buy and sell shares.

Segmentation of Securities Market:

Primary Market:
Market:
It deals with the issuance of new securities. Companies, governments or public sector
institutions can obtain funding through the sale of a new stock or bond issue. (it deals with
new co which makes the new issue of the securities egg- shares ,debenture etc.)

Secondary Market:
Market:
The financial market for trading of securities that have already been issued in an initial public
offering.
It comprises of the stock exchanges which provide a platform for the purchase and sale of
securities.

Money market
The money market is the market for short-term financial instruments. Money market instruments
include Treasury bills, bankers acceptances, commercial paper, Federal funds, municipal notes, and
other securities. The common characteristic of money market instruments is that they all have
maturities of one year or less, and often 30 days or less

Depository ---A system of computerized book-entry of securities. This arrangement enables a

transfer of shares through a mere book-entry rather than the physical movement of certificates.

At present, there are two Depositories in India, National Securities Depository Limited (NSDL) and
Central Depository Services (CDS). NSDL was the first Indian Depository.

3) How does the Depository System operate?

Holds securities in accounts

Transfers securities in accounts

Transfers without handling physical securities

Safekeeping of securities

All the holders must sign the instruction

NAV Net Asset Value:

Value: The per share price of a mutual fund.

Formula of NAV: Closing price of all securities owned + cash liabilities

Number of outstanding shares

Derivatives

Financial instruments such as futures and options, which derive their origional value from underlying
securities egg. Bonds, bills, currencies, and equities.
Futures / Forwards: Investment contracts which specify the quantity and price of a
commodity to be purchased or sold at a later date.

Options: ----- A contract that gives the owner the right to buy or sell a security at a
specific price within a specific time limit. Options can be further classified as call option and
put option. (They are generally available for 1 to 9 months, with some longer-term options
(called LEAPS) also available for selected securities)

1Call option:
option: An option to buy a certain asset by a certain date for a certain price.

2 Put option:
option: An option to sell a certain asset by a certain date for a certain price.

(If you want in brief then read the following)

Call Option
A call option gives the owner the right, but not the obligation, to buy the underlying stock at a given
price (the strike price) by a given time (the expiration date). The owner of the call is speculating that
the underlying stock will go up in value, hence, increasing the value of the option
Put Option
A put option gives the owner the right, but not the obligation, to sell the underlying stock at a given
price (the strike price ) by a given time (the expiration date). The owner is speculating that the option
will go up in value and the underlying stock will go down in value

Hedging: An investment strategy of lowering risk by buying securities that have off-setting risk
characteristics

Arbitrage:
Arbitrage: An act of buying securities in one market and selling in another at higher prices. It takes
advantage of a price differential existing in the prices of the same commodity or security in two or
more different markets.

Speculation:
Speculation: An act to take high risks for high return. It gives liquidity to the market

.
Collateral Management:
Management: Collateral management services are a method of securing a loan with
physical commodities. They are deposited as a pledge or guarantee that the loan will be repaid at
maturity; if not paid the commodities may be sold to reimburse the lender.

Settlement Cycle

The period within which the settlement is made, i.e; The period within which buyers receive their
shares and sellers receive their money.

.What is a settlement cycle?----. On the NSE, the cycle begins on Wednesday and ends on the
following Tuesday, and on the BSE the cycle commences on Monday and ends on Friday.

Process of trade settlement (selling):

(selling):
You
You
sell securities in any of the stock exchanges linked to NSDL through a broker
You give instruction to your DP to debit your account and credit the broker's [clearing member pool]
account
Before the pay-in day, your broker gives instruction to its DP for delivery to clearing corporation
Your broker receives payment from the stock exchange [clearing corporation]

What is corporate restructuring?

Corporate restructuring is necessary when a company needs to improve its efficiency and
profitability and it requires expert corporate management. A corporate restructuring strategy involves
the rebuilding of areas within an organization that need special attention from the management and
CEO.

A corporate action is an event initiated by a public company that affects the securities (equity or
debt) issued by the company. Some corporate actions such as a dividend (for equity securities) or
coupon payment (for debt securities (bonds)) may have a direct financial impact on the shareholders..
Types

Corporate actions are classified as Voluntary, Mandatory and Mandatory with Choice corporate
actions.

Mandatory Corporate Action : A mandatory corporate action is an event initiated by the corporation
by the board of directors that affects all shareholders. Participation of shareholders is mandatory for
these corporate actions. An example of a mandatory corporate action is cash dividend. All holders are
entitled to receive the dividend payments, and a shareholder does not need to do anything to get the
dividend. There is nothing the Share holder has to do or does in a Mandatory Corporate Action.

Voluntary Corporate Action : A voluntary corporate action is an action where the share holders
elect to participate in the action. An example of a voluntary corporate action is a tender offer. A
corporation may request share holders to tender their shares at a pre-determined price. The
shareholder may or may not participate in the tender offer.

Mandatory with Choice Corporate Action : A Mandatory with Choice corporate action is a
mandatory corporate action where share holders are given a chance to choose among several
options. An example is cash/stock dividend option with one of the options as default. Share holders
may or may not submit their elections. In case a share holder does not submit the election, the default
option will be applied..

A stock split or stock divide increases or decreases the number of shares in a public company. The
price is adjusted such that the before and after market capitalization of the company remains the
same and dilution does not occur. Options and warrants are included.Take, for example, a company
with 100 shares of stock priced at $50 per share. The market capitalization is 100 $50, or $5000.
The company splits its stock 2-for-1

Spin-Offs

A spin-off is a new organization or entity formed by a split from a larger one, such as a television
series based on a pre-existing one, or a new company formed from a university research group or
business incubator
The common definition of spin out is a division of a company or organization that becomes an
independent business.

Corporate spin-off
Government spin-off
Media spin-off
Research spin-off.

Accounting Terms

Reconciliation --is the adjusting of the difference between two items (e.g., balances, amounts,
statements, or accounts) so that the figures are in agreement. Often the reasons for the differences
must be explained.
One example would be reconciling a checking account (bringing the checking ledger and bank
balance statement into agreement).

Reasons for Reconciliation:

1) Cheques deposited into bank but not recorded in the bank book.
2) Cheques issued but not presented in bank.
3) Bank charges directly debited from bank account not mentioned in bank book.
4) ECS, not mentioned in bank book.
5) Interested credited into bank account not mentioned in bankbook.
6) Cheques deposited not cleared.

Accounts Payable
This current liability account will show the amount a company owes for items or services
purchased on credit and for which there was not a promissory note.

Accounts Receivable
A current asset resulting from selling goods or services on credit (on account)

Naked call Definition-A short call option position in which the writer does not own the
corresponding number of shares of the underlier, or has not deposited in a cash account an amount
equal to the exercise value of the call. also called uncovered call. opposite of covered call.

Hedging
An investment strategy of lowering risk by buying securities that have offsetting risk characteristics...
Hedge funds are investment pools that are free to use any hedging techniques they desire and they
often make large bets in a relatively small number of different holdings.

Intraday Trading
Intraday share trading refers to the buying and selling (or vise versa) of the same script in the same
trading session ( on the same day).

Blue Chip Companies:

A blue chip stock is the stock of a well-established company having stable earnings and no
extensive liabilities.

NASDAQ: -- An acronym for National Association of Security Dealers Automated

Quotations System, which is a nationwide network of computers and other electronic equipment that
connects dealers in the over-the-counter market across the U.S

National Stock Exchange (NSE) It is a nationwide screen-based trading network using

computers, satellite link and electronic media that facilitate transactions in securities by investors
across India
Volatility
The measure of the tendency of prices to fluctuate widely. Prices of small companies tend to
be more volatile than those of large corporations. Beta is a measure of volatility

Bear -- A person who expects share prices in general to decline and who is likely to indulge in
SHORT SALES.
Bear Market -- A long period of declining security prices.

Bull --- A person who expects share prices in general to move up and who is likely to take a long
position in the stock mark.

Retained Earnings
Net profits kept to accumulate in a business after dividends are paid.
Custodian
A financial institution that has the legal responsibility for a customer's securities. This implies
management as well as safekeeping.

Subprime
. Subprime are the borrowers typically who have low credit scores due to prior bankruptcy,
missed loan payments, home repossession etc

Share market is a place where companies list their shares available to common public for buying &
selling.
these shares are now mostly held in demat form, i.e. electronic and not physical.

What is a Stock Exchange? A common platform where buyers and sellers come together to
transact in stocks and shares.

What is electronic trading? Process in which. Brokers can trade from their offices, using fully
automated screen-based processes. Their workstations are connected to a Stock Exchange's central
computer via satellite using Very Small Aperture Terminus (VSATs).

How many Exchanges are there in India? The Stock Exchange, Mumbai (BSE) and the National
Stock Exchange (NSE) are the country's two leading Exchanges.
What is an Index? An Index is a comprehensive measure of market trends, intended for investors
who are concerned with general stock market price movements

What is a contract note? A contract note describes the rate, date, time at which the trade was
transacted and the brokerage rate

What is a book-closure/record date? Book closure and record date help a company determine
exactly the shareholders of a company as on a given date

. Split---- is book entry wherein the face value of the share is altered to create more number of shares
outstanding without calling for fresh capital or without altering the share capital account. For example
if a company announces a two-way split, it means that a share of the face value of Rs.10 is split into
two shares of face value Rs.five each and a person holding one share now holds two shares.

What is buy-back?---It is a process by which a company can buy-back its shares from shareholders.
A company may buy-back its shares in various ways from existing shareholders on a proportionate
basis through a tender offer

from open market through book-building process

from the Stock Exchange ,from odd lot holders

A company cannot buy-back its shares through negotiated deals, whether on or off the Stock
Exchange or through spot transactions or through any private arrangement.

What is short selling?----It is a sale of a security that the seller does not own, or any sale that is
completed by the delivery of a security borrowed by the seller. Short selling is a legitimate trading
strategy. Short sellers assume the risk that they will be able to buy the stock at a more favourable
price than the price at which they sold short.

What is an auction?--- Auction is conducted for those securities that members fail to deliver/short
deliver during pay-in.

Demat ---is a commonly used abbreviation of Dematerialisation, which is a process whereby

securities like shares, debentures are converted from the "material" (paper documents) into electronic
data and stored in the computers of an electronic Depository. You surrender material securities
registered in your name to a Depository Participant (DP).

What is the procedure for the dematerialisation of securities?---Check with a DP as to whether

the securities you hold can be dematerialised. Then open an account with a DP and surrender the
share certificates.

What is ALBM?--- ALBM is an acronym for automated lending/borrowing mechanism. It is a stock-

lending product introduced by NSCCL (National Securities Clearing Corporation Limited) with the
primary objective of providing a window for trading members of NSE to borrow securities/funds to
meet their pay-in obligations
What is a rolling settlement---? The rolling settlement ensures that each day's trade is settled by
keeping a fixed gap, between a trade and its settlement, of a specified number of working days. At
present this is five working days after the trading day.

What is an IPO? An IPO is an abbreviation for Initial Public Offer. When a company goes public for
the first time or issues a fresh stock of shares, it offers it to the public directly.

What is Book Building? Book Building is a process used for marketing a public offer of equity
shares of a company and is a common practice in most developed countries. Book Building is so-
called because the collection of bids from investors are entered in a "book".

What is an ex-dividend date?----The date on or after which a security begins trading without the
dividend (cash or stock) included in the contract price.

What is an ex-date?----The first day of the no-delivery period is the ex- date. If there is any corporate
benefits such as rights, bonus, dividend announced for which book closure/record date is fixed, the
buyer of the shares on or after the ex -date will not be eligible for the benefits.

What is a no-delivery period?--Whenever a company announces a book closure or record date, the
Exchange sets up a no-delivery (ND) period for that security.

What is bad delivery?-- Bad delivery exists only when shares are transferred physically. In "Demat"
bad delivery does not exist.

What is EPS, P/E, BV and MV/BV?-----

MV/BV?----- (P/E): Price earning multiple is ratio between market value per
share and earning per share.

2)Book Value (BV): (of a common share) The company's Net worth (which is paid-up capital +
reserves & surplus) divided by number of shares outstanding.

3)Market value to book value ratio (MV/BV ratio): It is the ratio between the market price of a
security and Book Value of the security.

.Bonus Shares-------Given as bonus free to existing equity shareholders.

Foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is
where banks and other official institutions facilitate the buying and selling of foreign currencies

Types of Bonds---- Government Bonds: These are fixed-income debt securities issued by the
government. Municipal Bonds: These are debt securities issued by state governments and their
agencies. Corporate Bonds: These are debt instruments issued by a company and
backed by its ability to generate profits

What is a Commodity Market?

A commodity market is a place where the exchange of primary or raw products happens in regulated
commodity exchanges
Investment banking :. The role of the investment bank is to issue and sell securities in the primary
market on behalf of the international companies.

Hedge Funds : Hedge funds are basically investment funds, which charge a performance fee. Hedge
funds are different from the mutual funds, pension funds and insurance companies. Hedge funds can
deal with the futures, swaps and other derivative markets.

Net Present Value (NPV)

Net Present Value = (Present Value of Inflow of Cash) (Present Value of Outflow of Cash)

NPV helps to measure the value of a currency today with that of the future, after taking into
consideration returns and inflation

What Does Equity Mean?---1. A stock or any other security representing an ownership interest

Deflation:-----In economics, deflation is a decrease in the general price level of goods and
services.[1] Deflation occurs when the annual inflation rate falls below zero percent, resulting
in an increase in the real value of money a negative inflation rate

Nowadys shares are purchased and sold online which is called E-broking.

Immobilization of securities -----means shares are kept with depositary but buying and selling
of securities takes place without physical movement of securities

Mutual Fund

Mutual Fund
Mutual Fund is a investment company that pools money from shareholders and invests in a variety
of securities, such as stocks, bonds and money market instruments Most open-end mutual
funds continuously offer new shares to investors.

An open-ended Mutual fund is one that is available for subscription and repurchase on a continuous
basis. These Funds do not have a fixed maturity period. Investors can conveniently buy and sell
units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of
open-end schemes is liquidity.

A close-ended Mutual fund has ----a stipulated maturity period e.g. 5-7 years. The fund is open for
subscription only during a specified period at the time of launch of the scheme. Investors can invest in
the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the
scheme on the stock exchanges where the units are listed.

The Sensex is an "index". What is an index? An index is basically an indicator. It gives you a general
idea about whether most of the stocks have gone up or most of the stocks have gone down.

The Sensex is an indicator of all the major companies of the BSE.

The Nifty is an indicator of all the major companies of the NSE.
 Stock market

Stock market is a market for the trading of company stock, and derivatives of same; both of these are
securities listed on a stock exchange as well as those only traded privately.

The term "stock market" refers to the business of buying and selling stock.

1.Swaps
In finance, a swap is a derivative in which two counterparties agree to exchange one stream of
cash flows against another stream. These streams are called the legs of the swap. THEYare
contracts to exchange cash (flows)

2 .Fixed income securities

Bonds, preferred stock, and treasury bills that generate a specified amount of income over a
certain period., and are considered low-risk investments. also called fixed income securities

4.The bond market

(also known as the debt, credit, or fixed income market) is a financial market where
participants buy and sell debt securities, usually in the form of bonds

5.The Liabilities side of the balance sheets shows the sources of income into the business
and the Assests side shows how the income has been utilized

6 How does one execute an order? Select a

broker of your choice and enter into a broker-client agreement and fill in the client registration
form. Place your order with your broker preferably in writing. Get a trade confirmation slip on
the day the trade is executed and ask for the contract note at the end of the trade date.

7.Why does one need a broker? As

per SEBI (Securities and Exchange Board of India.) regulations, only registered members can
operate in the stock market. Deal can be done only through a registered broker of a
recognised Stock Exchange or through a SEBI- registered sub-broker

8.What is the difference between book closure and record date? In

case of a record date, the company does not close its register of security holders. Record date
is the cut off date for determining the number of registered members who are eligible for the
corporate benefits. In case of book closure, shares cannot be sold on an Exchange bearing a
date on the transfer deed earlier than the book closure.

9.What are company objections?

A list documenting reasons by a company for not transferring a share in the name of an
investor is called company objections. Rejection occurs due to a signature difference, or fake
shares.

10.What are micro-cap, small-cap, mid-cap, large-cap companies?THE CO WHICH HAS

MARKET CAPITALISATION OF eg -$50 - $300 million is Micro cap,---Small Cap: $300 million - $2
billion,--- Mid Cap: $2 - $10 billion, Big Cap: $10 - 200 billion ----- Mega Cap: $200+ billion

11.Who is a Depository Participant?

In India, a Depository Participant (DP) is described as an agent of the depository. They are the
intermediaries between the depository and the investors. Similar to the brokers who trade on
your behalf in and outside the Stock Exchange;

12.What is equity?

Funds brought into a business by its shareholders is called equity. It is a measure of a stake
of a person or group of persons starting a business

What is the difference between book closure and record date?

In case of a record date, the company does not close its register of security holders. Record
date is the cut off date for determining the number of registered members who are eligible for
the corporate benefits. In case of book closure, shares cannot be sold on an Exchange
bearing a date on the transfer deed earlier than the book closure.

Closing stock in trial balance

The reason why closing stock is not taken into account in a trial balance is because a trial
balance is a balance of all ledger account a given point in time.It records only transactions
which have a two way effect But closing stock is not a transaction having a two way effect any
given point in time.It is only an indication of the goods lying in the factory at the end of the yea

Window Dressing

A strategy used by mutual fund and portfolio managers near the year or quarter end to
improve the appearance of the portfolio/fund performance before presenting it to clients or
shareholders.

Outstanding checks are checks that have been written and recorded in the company's Cash
account, but have not yet cleared the bank account.

An NSF check is a check that was not honored by the bank due to insufficient funds NSF is
the acronym for not sufficient funds.

Notes Receivables are assets of a company. When notes come due, the company might ask
its bank to collect the note receivable
Deposits in transit are amounts already received and recorded by the company, but are not yet recorded
by the bank. For example, a retail store deposits its cash receipts of August 31 into the bank's night
depository at 10:00 p.m. on August 31. The bank will process this deposit on the morning of September 1.
As of August 31 (the bank statement date) this is a deposit in transit.

Financial Statements
The Balance Sheet lists the balances in all Asset, Liability and Owners' Equity accounts.

The Income Statement lists the balances in all Revenue and Expense accounts.

The Accounting Equation really is:

The accounting equation can be expressed in 3 ways:

1. Assets = Liabilities + Owners' Equity

2. Liabilities = Assets - Owners' Equity
3. Owners' Equity = Assets Liabilities

There are 5 types of Accounts.

1) Assets 2) Liabilities 3) Owners' Equity (Stockholders' Equity for a corporation)
4) Revenues 5) Expenses

FREEZE------ A demat account holder may freeze the account only for debits by submitting a freeze
instruction to its DP. On execution of the freeze instruction by the DP, the status of the account will
change to `Suspended for Debit'.

13.What
13.What is GAAP? -
-Generally Accepted Accounting Principles

14.What kinds of items are posted in the Income statement?

statement?

Income statement, also called profit and loss statement (P&L) and Statement of Operations, is a
company's financial statement that indicates how the revenue () is transformed into the net income all
income,expences and loses are posted in income statement.

15.What is depreciation and the method?

Depreciation is the wear and tear use of the asset.

Types are: Straight line Method and Written down value method

18.How
18.How is SENSEX calculated?
calculated?

Sensex is an index which shows whether the stocks have gone up or gone down and accordingly the
sensex is calculated.
7.What are the types of cash flows?

The Statement of Cash Flows is the third financial statement required by GAAP, for full disclosure. The
Cash Flow statement shows the inflows and outflows of Cash over a period of time, usually one year.

There are 3 types of cash flow (CF):

1) Operating - CF generated by normal business operations
2) Investing - CF from buying/selling assets: buildings, real estate, investment portfolios, equipment.
3) Financing - CF from investors or long-term creditors

Types of Cash Flow Statement There are two types of Cash Flow Statement which you will come across,
these are:

Actual Cash Flow Statements,-- these show an historic view, showing the actual flows of cash into
and out of a business that have occurred over a previous trading period, e.g. 6 months, or 1 year.
Or a Forecast Cash Flow Statement --showing the expected flows of cash into and out of a
business over a trading period in the immediate future, e.g. next 6 months or year.

19.What is ISIN?

An (ISIN) ISIN stands for International Security Identification Number. An account holder may freeze a
particular ISIN (security of a specific company) from being debited from the account, without freezing the
whole.

20.What
20.What is Insider Trading?
Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by
individuals with potential access to non-public information about the company. In most countries, trading
by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if
this trading is done in a way that does not take advantage of non-public information.

23.What is transposition-cum-demat?

Transposition-cum-demat facility enables an investor to transpose names of the joint holders in desired
order along with the process of dematerialisation of certificates..
Illustratively
egg . if A owns a security, which he holds in the joint names of ABC, ACB, etc. he can first transpose
them in the name of, say, ABC in which order demat account might have been opened.
No new name can be added through transposition process. Similarly, existing names cannot be deleted.

24.What is transmission-cum-demat?
transmission-cum-demat?

Transmission-cum-demat facility enables an investor to dematerialize securities held in joint names in a

BO account opened in the names of same joint holders in the event of death of a joint holder.
25.What do you mean by 'Market Trades' and 'Off Market Trades'?

Any trade settled through a clearing corporation is termed as the 'Market Trade'. These trades are done
through stock brokers on a stock exchange.
'Off Market Trade' is one which is settled directly between two parties without the involvement of clearing
corporation.

26.What
26.What settlement details are required on the delivery instruction slip?
slip?

On every stock exchange various settlements are effected every day such as weekly settlement, daily
settlement, auction settlement etc. Each of these settlements is identified by the combination of the market
type and the settlement number. You are required to mention the appropriate settlement details on the
delivery instruction slip while transferring the shares to your broker's account. These settlement details are
available on the contract note issued by the broker.

27.What is T+2 rolling settlement cycle

T+2 means that trades are settled two working days after the day the trade takes place. For instance, trades
taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.

30.Types of Capital Market?

Capital Markets : The capital market (securities markets) is the market for securities, where companies and
the government can raise long-term funds. The capital market includes the stock market and the bond
markettypes are.Primary Markets: Secondary Market:.

33.How many times can one buy and sell within a settlement cycle?

It's possible to by and sell within a settlement cycle many times, which is what traders do. They settle only
their net outstanding positions at the end of the cycle. In other words, the settlement is made for the net
outstanding positions at the end of the settlement cycle.